U.S.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  Form
10-Q  (Mark
One)  | X |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934   For the
quarterly period ended: August 31, 2010   |__|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934   Commission file number: 000-27225   DigitalTown, Inc. (Name of
registrant in its charter)  Minnesota
41-1427445(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)11974 Portland Avenue, Burnsville, Minnesota
55337(Address of principal executive offices)
(Zip Code)Registrant's telephone number: (952)
890-2362   Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
X

No  Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
       [  ]  Yes  [X]  No
(Not required)  Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.  See definitions of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act.   (check
one):      Large
Accelerated Filer [  ] Accelerated
Filer [  ] Non-Accelerated
Filer [  ] Smaller reporting
company [X]  Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).      [  ]  Yes  [X]
 No  There were 27,914,213
shares of the registrants common stock outstanding as of October12, 2010.  ii      TABLE OF
CONTENTS   PART
IItem
1.
Financial
Statements
1-14Item
2.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
15-21Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
21Item
4.
Controls
and Procedures
21-22PART
IIItem
1.
Legal
Proceedings
23Item
1A
Risk
Factors
23Item
2.
Unregistered
sales of Equity Securities and Use of Proceeds
23Item
3.
Defaults
Upon Senior Securities
23Item
4.
(Removed
and Reserved)
23Item
5.
Other
Information
24Item
6.
Exhibits
24    iii        PART
I  ITEM
1.  FINANCIAL STATEMENTS  PageFinancial
Statements:Consolidated
Balance Sheets
1Consolidated
Statements of Operations
2Consolidated
Statements of Cash Flows
3Notes to
Financial Statements
4-14


DigitalTown, Inc. CONSOLIDATED BALANCE SHEETS  ASSETSAugust 31,2010

February 28,2010(unaudited)

(audited)Current
assets:Cash

$      9,673

$      34,178Prepaid
domain name renewal fees

84,822

54,825Prepaid
expense

20,000

20,000Total
current assets

114,495

109,003Property and
equipment, net

18,794

1,719Intangible
assets, net

927,855

830,177Total
assets

$
  1,061,144

$
   940,899LIABILITIES AND STOCKHOLDERS' EQUITYCurrent
liabilities:Accounts
payable

$
      146,377

$
      55,412Loan
from director/stockholder

86,304

137,370Other
liability

-

15,000Accrued
payroll

1,331

2,563Deferred
officer compensation

25,288

21,723Total
current liabilities

259,300

232,068Commitments
and contingenciesStockholders
equity:Common
stock, $.01 par value, 2,000,000,000 shares authorized, 27,914,213 and
27,476,246 shares issued and outstanding at August 31, 2010 and
 February 28, 2010, respectively

279,139

274,759Additional
paid-in-capital

21,368,400

20,894,677Subscription
receivable

(1,763,013)

(1,894,463)Accumulated
deficit

(19,082,682)

(18,566,142)Total
stockholders equity

801,844

708,831Total
liabilities and stockholders equity

$
   1,061,144

$
   940,899   The
accompanying notes are an integral part of these consolidated financial
statements.  1      DigitalTown, Inc.  CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months Ended

Six Months EndedAugust 31,

August 31,2010

2009

2010

2009(unaudited)

(unaudited)

(unaudited)

(unaudited)Revenues
$
          5,077

$
          1,951

$
          9,147

$
          1,951Cost of revenues
51,843

44,142

108,497

44,142Loss from operations
(46,766)

(42,191)

(99,350)

(42,191)Operating expenses:Selling, general and
administrative expenses
227,318

(48,079)

423,304

371,634Income (loss) from operations
(274,084)

5,888

(522,654)

(413,825)Other
income (expense):Interest
expense
(1,544)

(2,509)

(3,792)

(4,565)Other
income
2,303

-

9,906

1,815Total
other income (expense)
759

(2,509)

6,114

(2,750)Net
income (loss) before income taxes
(273,325)

3,379

(516,540)

(416,575)Income
tax provision
-

-

-

-Net
income (loss)
$
     (273,325)

$
     3,379

$   (516,540)

$   (416,575)Income (loss) per common share  basic
$
       (0.01)

$
       0.00

$
       (0.02)

$
       (0.02)Weighted
average common shares outstanding  basic
27,810,431

27,362,885

27,645,077

27,296,799Income (loss) per common share  diluted
$
       (0.01)

$
       0.00

$
       (0.02)

$
       (0.02)Weighted average common shares outstanding 
diluted
27,810,431

27,362,885

27,645,077

27,296,799  The accompanying notes are an integral part of these
consolidated financial statements.     2    DigitalTown, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS  Six months
   ended
August 31, 2010

Six months
   ended
August 31, 2009(unaudited)

(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$  (516,540)

$  (416,575)Adjustments to reconcile net loss to net cash flows
used in operating activities:Depreciation
2,926

1,152Amortization of website
development cost
3,893

1,317Stock-based compensation
expense
126,040

47,166Non-cash stock
issued for director fees
13,859

12,000Non-cash stock
issued for deferred officer compensation
28,204

-Changes in
operating assets and liabilities:Prepaid
domain name renewal fees
(29,997)

(99,926)Accounts
payable
90,965

(65)Accrued
payroll
(1,232)

(924)Deferred
officer compensation
3,565

-Other
liability
(15,000)

-Net
cash used in operating activities
(293,317)

(455,855)CASH FLOWS FROM INVESTING
ACTIVITIES:Purchase of
property and equipment
(20,001)

-Purchase of
intangible asset-website development
(95,787)

(23,349)Purchases and
 renewal of  intangible assets -domain names
(5,784)

(11,448)Net
cash used in investing activities
(121,572)

(34,797)CASH FLOWS FROM FINANCING
ACTIVITIES:Proceeds from loan  director/stockholder
-

39,482Payments on loan  director/stockholder
(51,066)

(2,141)Payments
received on stockholder subscription receivables
431,450

135,500Proceeds from
issuance of common stock
10,000

294,500Net cash provided by financing
activities
390,384

467,341Net change in cash and cash equivalents
(24,505)

(23,311)Cash and cash equivalents,
beginning of period
34,178

43,914Cash and cash equivalents,
end of period
$       9,673

$       20,603  The accompanying notes are an integral part of these consolidated
financial statements.





3


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   **Note 1. Basis
of Presentation**  The
accompanying unaudited consolidated financial information has been prepared
by DigitalTown, Inc. (the Company) in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission
(SEC).  Accordingly, it does not include all of the information and
notes required by accounting principles generally accepted in the United States
of America for complete financial statements.  In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of this financial information have
been included.  Financial results for the interim period presented are
not necessarily indicative of the results that may be expected for the fiscal
year as a whole or any other interim period.  This financial
information should be read in conjunction with the audited consolidated
financial statements and notes included in the Companys Annual Report on Form
10K for the year ended February 28, 2010.  Note 2. Nature of
Business and Summary of Significant Accounting Policies:  Nature of
Business  The
Company was founded in 1982 under the laws of the State of Minnesota as Command
Small Computer Learning Center, Inc., a computer training company and operated
under several different names in the computer hardware and training sector. In
2005, the Company began acquiring domain names.  On March 1, 2007, the
Company changed its name to DigitalTown, Inc. and began developing a business
plan to develop a platform to monetize the domain names. The Companys
headquarters are located at 11974 Portland Avenue, Burnsville, MN 55337, and its
telephone and facsimile numbers are (952) 890-2362 and (952) 890-7451,
respectively. The Company's Internet address is www.digitaltown.com.   The
Company is traded in the over-the-counter market under the ticker DGTW.  The
Company has sustained losses and negative cash flows from operations and expects
these conditions to continue into the foreseeable future.  At August 31,
2010, the Company had an accumulated deficit of $19,082,682.  Subsequent to
August 31, 2010, the Company has received cash proceeds totaling $15,000 from
its stock subscription receivables.  The Company anticipates that existing
cash, stock subscription proceeds received to date, expected future proceeds
from its stock subscription receivables and any additional financing needed
through the sale of its common stock or other equity-based securities will be
sufficient to meet its working capital and capital expenditures needs through at
least August 31, 2011.  In the event that we are unable to obtain
additional capital in the future, we would be forced to reduce operating
expenses and/or cease operations altogether.  Principles
of Consolidation  The
Company files consolidated financial statements that include its wholly-owned
subsidiary Tiger Media. All material intercompany accounts and transactions have
been eliminated in consolidation.


4


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   **Use of
Estimates**  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting period.
 Actual results could differ from those estimates.  Revenue
Recognition  The
Company recognizes revenue when it is realized or realizable and has been
earned.  Revenue is generated from commerce-based transactions generated
from our websites and display of graphical advertisements (display
advertising).  Intangible
Assets  Domain Names/Website Development Costs  Domain
name costs are accounted for in accordance with the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC 350-30) guidance
pertaining to Intangibles-Goodwill and Other, Website Development Costs.
 Certain modules and components of the Companys overall website
development are ready for their intended use and the Companys resulting
websites are currently operational. Accordingly, the annual domain name renewal
fees are currently being amortized over one year and the purchase of any new
domain names are the only amounts being capitalized.  Previously, during
the infrastructure development stage of its websites, the Company capitalized
the purchase of new domain names and the annual domain name renewal fees.
Additionally, since the ownership of each domain name can be renewed for a
nominal renewal fee each year prior to their expiration date, the useful lives
of the domain names are deemed to be indefinite and no amortization of the
capitalized costs for the domain names will be recorded.  Website
development costs are accounted for in accordance with the FASB Accounting
Standards Codification (ASC 350-30) guidance pertaining to Intangibles-Goodwill
and Other, Internal-Use Software which requires that all internal and external
costs incurred to develop the internal-use software necessary to operate the
websites be capitalized.  The guidance further states, amortization should
begin when an individual module or component of the overall internal-use
software is ready for its intended use. The Company has components of its
website development that are operational.  The cost of such module or
component are being amortized on a straight-line basis over its estimated useful
life of three years, as determined by the Company, after taking into account the
effects of obsolescence, technology, competition and other economic factors.  Impairment
of Long-Lived Assets  Long-lived assets, such as property and equipment and intangible
assets  domain names/website development costs are reviewed for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of assets to be held and used is
measured by comparison of the carrying amount of an asset to estimated
undiscounted future cash flows


5


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset.  Income
Taxes  The
Company accounts for income taxes by following an asset and liability approach
to financial accounting and reporting for income taxes. Accordingly, deferred
tax assets and liabilities arise from the difference between the tax basis of an
asset or liability and its reported amount in the financial statements. Deferred
tax amounts are determined using the tax rates expected to be in effect when the
taxes will actually be paid or refunds received, as provided under currently
enacted tax law. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense or
benefit is the tax payable or refundable, respectively, for the period plus or
minus the change in deferred tax assets and liabilities during the period.
 The Company has three open years of tax returns subject to
examination.  The
Company follows the recognition of a financial statement benefit of a tax
position only after determining that the relevant tax authority would
more-likely-than-not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
consolidated financial statements is the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement with the
relevant tax authority.  Stock-Based
Compensation and Warrants  The
Company measures and recognizes compensation expense for all stock-based payment
awards made to employees and directors on a straight-line basis over the
respective vesting period of the awards.  The compensation expense for
the Company's stock-based payments is based on estimated fair values at the time
of the grant of the portion of stock-based payment awards that are ultimately
expected to vest.  The
Company estimates the fair value of stock-based payment awards on the date of
grant using the Black-Scholes option pricing model. This option pricing model
involves a number of assumptions, including the expected lives of stock options,
the volatility of the public market price for the Company's common stock and
interest rates.  Recently
Issued Accounting Pronouncements  In
January 2010, the FASB issued Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair- value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The adoption of this guidance did not have an
impact on our consolidated financial statements.


6


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Note 3. Intangible
Assets  Intangible assets,
net are as follows:  August 31,     2010
February 28,     2010Domain
names
$
    817,820
$
     812,036Website
development costs
119,136
23,349Less
accumulated amortization
(9,101)
(5,208)$
    927,855
$
     830,177  During
the six months ended August 31, 2010, the Company capitalized $5,784 in
additional domain name purchases.  Since the useful life of the domain
names is deemed to be indefinite, no amortization has been recorded.  During
the six months ended August 31, 2010, the Company incurred $130,599 of annual
domain name renewal fees and recorded them as prepaid domain name renewal fees.
 During the three and six months ended August 31, 2010, the Company
expensed $47,896 and $100,602 of these prepaid domain name renewal fees,
respectively, on a straight line basis to cost of revenues in the Companys
consolidated statement of operations. At August 31, 2010, the Company had
$84,822 of prepaid domain name renewal fees which will be amortized over future
periods.  During
the six months ended August 31, 2010, the Company capitalized $95,787 of website
development costs and had a total of $119,136 at August 31, 2010.  The
Company has determined that the $95,787 of website development costs capitalized
during the six month period ended August 31, 2010 pertains to components of the
Companys website development that is not ready for its intended use and no
amortization has been recorded for these costs.  The Company had previously
determined that $23,349 of the $119,136 total capitalized website development
costs at August 31, 2010 pertained to components of its website development that
are ready for their intended use and have an estimated useful life of three
years.  During the three and six months ended August 31, 2010, the Company
recorded $1,946 and $3,893, respectively,  of website development
amortization expense pertaining to these components to cost of revenues in the
Companys consolidated statement of operations.  Note 4. Deferred
Officer Compensation  Richard
Pomije, the CEO and Chairman of the Company, has elected to forego a portion of
his salary at various times due to limited operating funds.  These amounts
do not accrue interest and are due and payable as funds become available in the
future.  On June 7, 2010, the Company issued 20,892 restricted common
shares at $1.35 per share, valued at $28,204, to pay the entire deferred
compensation balance accrued as of May 31, 2010.  During the three months
ended August 31, 2010, the Company recorded $25,288 of additional deferred
officer compensation and that amount is still owed as of August 31, 2010.


7


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)    Note 5.
Stockholders Equity  Stock Transactions  On
August 15, 2010, the Company issued 7,917 restricted common shares at $1.20 the
market price per share, valued at $9,500, to seven directors of the Company for
payment of director fees.  On June
22, 2010, the Company issued 400,000 restricted common shares at a price of
$0.75 per share to an existing shareholder (related party), valued at $300,000
in exchange for a stock subscription agreement (see further details in Note 9,
2010 Agreement).  On June
7, 2010, the Company issued 20,892 restricted common shares at $1.35, the market
price per share, valued at $28,204, to Richard Pomije, the CEO and Chairman of
the Company for payment of deferred compensation.  On May
15, 2010, the Company issued 2,491 restricted common shares at $1.75, the market
price per share, valued at $4,359, to six directors of the Company for payment
of director fees.  During
the quarter ended May 31, 2010, the Company entered into stock purchase
agreements and issued 6,667 units (each unit consisting of one share of common
stock and a two-year warrant to purchase one share of common stock at an
exercise price of $4.00 per share) at a unit price of $1.50, for total cash
proceeds of $10,000.  Stock Warrants  As of
August 31, 2010, the Company has a total of 229,668 stock purchase warrants
outstanding with an exercise price of $4.00.  The warrants expire two years
from their date of issuance.  The weighted average remaining exercise
period as of August 31, 2010 is 0.73 years.  Other  In
February 2010, the Company entered into an agreement with an investment banker
to promote and sell shares of common stock to accredited and institutional
investors.  In conjunction with the potential sale of shares of common
stock, the investment banker will receive a 10% commission, be reimbursed
for expenses and was granted a five-year warrant of the Company's
common stock equal to 10% of the shares of common stock sold.  As of
October 15, 2010, the Company has not received any proceeds from the sales of
shares of common stock associated with this agreement.  In February 2010,
the Company paid the investment banker $20,000 as an advance on expenses and any
potential commission earned.  The Company has recorded the advance as a
prepaid expense as of August 31, 2010.


8


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   **Note 6. Stock
Options**  The
Company has one stock option plan called The 2006 Employee Stock and Option
Plan. As of August 31, 2010, an aggregate of 5,000,000 shares of common stock
may be granted under this plan determined by the Board of Directors. The stock
options may be granted to directors, officers, employees, consultants and
advisors of the Company.  Options granted under this plan are non-qualified
stock options and have exercise prices and vesting terms established by the
Board of Directors at the time of each grant.  Potential vesting terms of
the outstanding options range from immediate to two years from the grant date
anniversary.  The terms of the options are five years from the date of
grant.  The
Companys consolidated financial statements as of and for the six months ended
August 31, 2010 and 2009, reflect the impact of their stock-based compensation.
 For the three months ended August 31, 2010, the Company granted stock
options to one director allowing for the purchase of up to an aggregate of
200,000 shares of common stock, with a weighted-average-grant-date fair value of
$1.14. Total stock compensation expense for all option grants was $93,049 and
$(183,139) for cancellations for the three months ended August 31, 2010 and
2009, respectively.  For the six months ended August 31, 2010 and 2009, the
Company has recorded $126,040 and $47,166 in stock compensation expense,
respectively.  This expense is included in selling, general and
administrative expense. As of August 31, 2010, there was no tax benefit from
recording this non-cash expense due to the Company having a full valuation
allowance against its deferred tax assets. The compensation expense impacted the
three and six months ended August 31, 2010 basic (loss) per common share by
$(0.003) and $(0.005), respectively. There remains $144,114 of total
unrecognized compensation expense, which is expected to be recognized over
future periods through July 31, 2012.  The
following table summarizes information about the Companys stock options:   Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contract Life (years)
Aggregate Intrinsic Value (1)Outstanding - February 28, 2010
4,003,000
$  2.326
-
-Granted
200,000
1.720
-
-Canceled or expired
(150,000)
(10.583)
-
-Exercised
-
-
-
-Outstanding  August 31, 2010
4,053,000
$  1.991
1.76
-Exercisable at August 31, 2010
3,915,000
$  1.997
1.65
-  (1) The
intrinsic value of an option is the amount by which the fair value of the
underlying stock exceeds its exercise price.  Note 7. Related
Party Transactions  The
Company entered into a five year lease with Jeff Mills, a director/stockholder
of the Company, for approximately 2,650 square feet of space used for offices
and operations equipment storage at 11974


9


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Portland Avenue, Burnsville, Minnesota.  The lease commenced
on December 16, 2006 at a monthly rent of $2,650 for the five year term of the
lease and contains an option to renew for an additional term of one year at a
monthly rent of $3,650.  The Companys lease payments made to the director
for the three months ended August 31, 2010 and 2009 totaled $7,950 and $7,950,
respectively. For the six months ended August 31, 2010 and 2009, the Company
recorded $15,900 in lease payments to the director for each period.  Minimum lease
payments at August 31, 2010 are as follows:FY
2011-remainder
$   15,900FY 2012
25,175$
  41,075  Loan from
Director/Stockholder  As of
August 31, 2010, the Company had an outstanding working capital loan of $86,304
from Jeff Mills, a director/stockholder of the Company.  The loan is due on
demand and bears annual interest at 7.0%.  The Company made principal
payments of $51,066 during the six months ended August 31, 2010.  Interest
expense incurred on this loan for the three and six months ended August 31, 2010
and 2009 was $1,544 and $3,792 and $2,509 and $4,565, respectively.  Note 8.
Commitments and Contingencies  The
Company is exposed to asserted and unasserted claims encountered in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.  Note 9. Common
Stock Subscriptions Receivable  As of
August 31, 2010, the Company has the following stock subscription agreements
outstanding of which the majority is due from a related party:  2005 Agreements  Material terms of the subscription agreements received by the
Company on August 31, 2005, for 78,376 restricted common shares and on December
30, 2005 for 4,733,333 restricted common shares at $0.75 per share respectively
(total value of $3,608,782) are as follows:  · Payment
is due in full in 60 months. · At
24 months, the Company can demand at its option, monthly 1/36 payments on the
subscription agreement. · The
Company has the option to charge simple annual interest of up to 4%. · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.


10


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   The outstanding
balance owed on the 2005 subscription agreements at August 31, 2010 is
$488,013.  2007
Agreements  On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share (total value of $3,250,000).  Significant
terms of the original subscription agreement are as follows:  · The
price per share of $2.50 was based on the closing price on October 4, 2007. · At
24 months, 1/36 payments are due monthly. · The
Company, at its option, may call up to 1/12 of the gross receivable per month if
the preceding 30 day average trading price is at or above $7.00 a share with
minimum trading volume of 5,000 shares per day. · If
the purchaser sells these common shares, the purchaser shall be entitled to an
amount equal to 200% of the original purchase price of each share and the
Company shall be entitled to 50% of any additional net sales proceeds from the
stock sale.  On
February 25, 2010, due to the recent economic downturn and the market value
decline of the Companys stock, which was trading below $2.50 per share, the
Company amended the pricing terms of the subscription agreements received by the
Company on October 5, 2007.  The amendment changed the following
significant terms of the subscription agreement:  The
parties agree that the Initial Pricing terms in the Confidential Binding Term
Sheet dated October 5, 2007 of the Agreement will be amended to state as
follows:  1. The Subscriber offers to purchase shares of the Company for $0.75
per share.  After the price adjustment, the revised total value of this
subscription agreement is $975,000.  The
following other provisions of the Initial Pricing and Final Pricing terms in the
Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be
deleted, and are not enforceable by either party:  · Beginning October 5, 2009, 1/36 payments are due each month
thereafter on the 5th of every month. · The Company at its option may call up to 1/12 of the (gross)
receivable note per month if the preceding 30 day average trading price is at or
above $7.00 a share.  Minimum trading volume must be 5,000 shares a
day. · As total consideration for the purchase and sale of the Companys
stock, purchaser shall ultimately pay to the Company the following amount (the
Purchase Price): A. Purchaser shall first be entitled to an amount equal to 200% of
the face amount of each share. B. After the purchaser receives the amount in A above, the Company
shall be entitled to 50% of any additional net sales proceeds of the stock.
 Net sales proceeds shall mean the gross proceeds received from the sale of
the stock, less reasonable brokerage commissions.


11


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   C. Final adjusted net sales proceeds will be wired to the Company
within 7 days from the final settlement of the sale of stock sold. The
outstanding balance owed on the revised 2007 subscription agreements at August
31, 2010 is $975,000.  2010
Agreement  Material terms of the subscription agreement received by the
Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per
share (total value of $300,000) are as follows:  · Payment
is due in full in 60 months. · At
24 months, the Company can demand at its option, monthly 1/36 payments on the
subscription agreement. · The
Company has the option to charge simple annual interest of up to 4%. · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.  The outstanding
balance owed on the 2010 subscription agreement at August 31, 2010 is
$300,000.  Summary  As of
August 31, 2010, the Company had stock subscription receivables of $1,763,013
and for the three months ended August 31, 2010, the Company received stock
subscription payments of $72,500.  The following tables
summarize information about the stock subscription receivable:  Receivable
balance at February 29, 2008
$   5,030,795Cash
collected
(523,832)Receivable
balance at February 28, 2009
4,506,963Cash
collected
(337,500)2007
Subscription agreement pricing revised (1)
(2,275,000)Receivable
balance at February 28, 2010
1,894,463New
subscription agreement (2)
300,000Cash
collected
(431,450)Receivable
balance at August 31, 2010
$
   1,763,013Summary of
outstanding subscriptions:2005
subscriptions
$
     488,0132007
subscriptions
975,0002010
subscriptions
300,000$
  1,763,013  (1) Amendment
to the terms of the subscription agreements received by the Company on October
5, 2007 for 1,300,000 restricted common shares reducing the price paid per share
from $2.50 to $0.75.


12


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   (2) New
subscription agreement received on June 22, 2010.  The
Company has not exercised its rights, per the 2005 subscription agreements, to
demand monthly 1/36 payments or to charge up to 4% interest on the subscription
amounts outstanding and they have provided no downside protection to the
subscribers.  The downside protection in the terms for the 2005
subscription agreements requires the Company to reimburse the subscription
holder up to 30% of the $.75 purchase price, or $.225, if the market price of
the stock is below $.75 when converted. The protection may be provided in
additional shares if necessary.  For the six month period ended August 31,
2010, there was no downside protection provided because the stock price did not
go below $.75 when converted.  The subscription agreements do not define
the term when converted.  The Company has taken the position that if at
the time that a purchaser makes a payment in full for the shares under a
subscription agreement and the closing price of the shares of the Companys
stock is less than $.75, the shareholder would be entitled to up to 30%
additional shares, depending on the trading share price.  Once the
subscription shares have been paid for in their entirety, the downside
protection ceases.  Note
10. Earnings (Loss) Per Share  The
Company computes earnings per share using two different methods, basic and
diluted, and presents per share data for all periods in which statements of
operations are presented. Basic earnings per share are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are computed by dividing net income
(loss) by the weighted average number of common stock and common stock
equivalents outstanding.  The
following tables provide a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings (loss) per share for the three
and six month periods ended August 31, 2010 and 2009:  Three months endedAugust 31,2010

2009Basic
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (273,325)

$
        3,379Weighted
average of common shares outstanding
27,810,431

27,362,885Basic net
earnings (loss) per share
$
                  (0.01)

$
                    0.00Diluted
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (273,325)

$
                  3,379Weighted
average of common shares outstanding
27,810,431

27,362,885Stock options
(1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,810,431

27,362,885Diluted net
income (loss) per share
$
                  (0.01)

$
                    0.00


13


DigitalTown, Inc.  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Six months endedAugust 31,2010

2009Basic
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (516,540)

$
            (416,575)Weighted
average of common shares outstanding
27,645,077

27,296,799Basic net
earnings (loss) per share
$
                  (0.02)

$
                  (0.02)Diluted
earnings (loss) per share calculation:Net income
(loss) to common shareholders
$
            (516,540)

$
            (416,575)Weighted
average of common shares outstanding
27,645,077

27,296,799Stock options
(1)
-

-Warrants
(2)
-

-Diluted
weighted average common shares outstanding
27,645,077

27,296,799Diluted net
income (loss) per share
$
                  (0.02)

$
                 (0.02)  (1)
At August 31,
2010 and 2009, there were outstanding stock options equivalent of
4,053,000 and 3,903,000 common shares, respectively.  The stock
options are anti-dilutive at August 31, 2010 and 2009 and therefore have
been excluded from diluted earnings per share.(2)
At August 31,
2010 and 2009, there were outstanding warrants equivalent to 229,668 and
196,334 common shares, respectively.  The warrants expire 2
years from their 2010 and 2009 date of issuance and have an exercise price
of $4.00 per share. The warrants are anti-dilutive at August 31, 2010 and
2009 and therefore have been excluded from diluted earnings per
share.  Note
11. Supplemental Disclosure of Cash Flow Information  Six months endedAugust 31,2010
2009Non-cash flow
information:Cash
paid for interest
$
         3,792
$
       4,565Non-cash
financing activities:Common
Stock issued with subscription agreement
$
     300,000
$
               -


14


**ITEM 2.
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**  The following is a discussion of the financial condition of the
Company as of August 31, 2010, and its results of operations for the three and
six months ended August 31, 2010 and 2009, which should be read in conjunction
with, and is qualified in its entirety by, the financial statements and notes
thereto included elsewhere in this report.  CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION  This
Form 10-Q for the quarter ended August 31, 2010, contains forward-looking
statements.  Forward-looking statements may be identified by the use of
forward-looking terminology, such as may, shall, could, expect,
estimate, anticipate, predict, probable, should, continue, or
similar terms, variations of those terms or the negative of those terms.
 The forward-looking statements specified in the following information have
been compiled by our management and are considered by management to be
reasonable.  Our future operating results, however, are impossible to
predict and no representation, guaranty, or warranty is to be inferred from
those forward-looking statements.  Company
Overview  The
Company continues to develop its nearly 27,000 spirit sites per their Contractor
Services Agreement with The Active Network Inc. (Active).  On February 3,
2010, the Company signed a Contractor Services Agreement with Active to perform
certain development services.  The specific services will be defined in
Statements of Work (SOW) which will be entered into from time to time between
the two parties.  The following design and development projects are
currently under way:  · System design and development services for the creation of a new
database integrating certain Active data with DigitalTowns database.  · System design and development services for the creation of a user
interface (UI) for a call center sales system integrating DigitalTowns database
with Actives self-serve ad system allowing ads to be targeted to specific
DigitalTown spirit sites.  This will allow advertisers to choose single or
multiple sites to cover geographic areas, including sub categories by team
sport, conference or other interest areas.  With nearly 27,000 spirit sites
covering the United States, national advertisers will be able to run both local
and nationwide advertising campaigns together.  · Graphic design and UI services for the spirit sites and
Digitaltown.com landing page/director.  · System development services to build the DigitalTown spirit sites.  RESULTS OF
OPERATIONS  THREE MONTHS ENDED
AUGUST 31, 2010 and 2009  During
the three months ended August 31, 2010, the Company recorded revenue of $5,077
and cost of revenue of $51,843 for a negative gross profit of $(46,766) compared
to revenue of $1,951 and cost of revenue of $44,142 for a negative gross profit
of $(42,191) for the same period in 2009.  For the two comparable periods,
revenue consisted of commissions generated from advertising on our websites and


15


cost of
revenue consisted of amortization of prepaid annual domain name renewal fees of
$47,896 for 2010 compared to $42,826 for 2009, server/bandwidth expense of
$2,001 for 2010 and zero for 2009 and amortization of website development fees
were $1,946 for 2010 and $1,317 for 2009.  Selling, general and administrative expenses for the most current
three months increased by $275,397 to $227,318 compared to a year ago due mainly
to a non-cash increase in stock compensation expense of $276,188 for the most
current three months.  Stock compensation expense was $93,049 for the three
months ended August 31, 2010 compared to a forfeiture credit of ($183,139) for
the three months ended August 31, 2009.  Excluding non-cash stock
compensation expense for the two comparable periods, selling, general, and
administrative expenses decreased by $791 for the current three months to
$134,269 compared to $135,060 for the same period last year.  The Companys
overall net loss for the current three months increased by $276,704 to
$273,325.  SIX MONTHS ENDED
AUGUST 31, 2010 and 2009  During
the six months ended August 31, 2010, the Company recorded revenue of $9,147 and
cost of revenue of $108,497 for a negative gross profit of $(99,350) compared to
revenue of $1,951 and cost of revenue of $44,142 for a negative gross profit of
$(42,191) for the same period in 2009.  For the two comparable periods,
revenue consisted of commissions generated from advertising on our websites and
cost of revenue consisted of amortization of prepaid annual domain name renewal
fees of $100,602 for 2010 compared to $42,826 for 2009, server/bandwidth expense
of $4,002 for 2010 and zero for 2009 and amortization of website development
fees were $3,893 for 2010 and $1,317 for 2009.  Selling, general and administrative expenses for the most current
six months increased by $51,670 to $423,304 compared to a year ago due mainly to
a non-cash increase in stock compensation expense of $78,874.  Excluding
non-cash stock compensation expense for the two comparable periods, selling,
general, and administrative expenses were $297,264 for the six months ended
August 31, 2010, compared to $324,468 for the six months ended August 31, 2009.
 The decrease in selling, general, and administrative expenses of $27,204
for the two comparable periods was primarily due to decreases in professional
fees of $32,291 and salary expense of $8,702 offset by an increase in
administrative fees of $6,500 and travel and entertainment of $3,482. The
Companys overall net loss for the current six months increased by $99,965 to
$516,540.  LIQUIDITY AND CAPITAL
RESOURCES  SIX MONTHS ENDED
AUGUST 31, 2010  The
Companys cash position at August 31, 2010, was $9,673, a decrease of $24,505
from $34,178 at February 28, 2010.  During the six months ended August 31,
2010, net cash used in operating activities was $293,317 compared to cash used
of $455,855 for the comparable period.  When comparing the two periods, the
decrease in cash used in operating activities of $162,538 for the six months
ended August 31, 2010 is primarily due to a decrease in prepaid domain name
renewal fees of $69,929 and an increase of $91,030 in accounts payable compared
to the same period last year.  Due to limited funds, the Company has been
extending the payment terms of our vendors.  Net
cash used in investing activities for the six months ended August 31, 2010 was
$121,572, of which $95,787 was used for website development costs, $20,001 for
the purchase of property and equipment and $5,784 for the purchase of additional
domain names as compared to net cash used of $34,797, of which


16


$23,349
was used for website development costs and $11,448 for the purchase of
additional domain names for the comparable period.  Net
cash provided by financing activities for the six months ended August 31, 2010
was $390,384 which consisted of payments received on stockholder subscription
receivables of $431,450, proceeds from the issuance of common stock of $10,000
partially offset by principal payments of $51,066 on the loan from a
director/stockholder.  For the comparable period ended August 31, 2009, the
Company received net cash provided by financing activities of $467,341 which
consisted of payments received on stockholder subscription receivables of
$135,500, proceeds from the issuance of common stock of $294,500 and proceeds
from a director/stockholder loan of $39,482 less principal payments on the loan
of $2,141.  Monthly
cash operating expenses for the six months ended August 31, 2010, were
approximately $50,000 per month, which included payment of $130,599 of the
projected yearly cost of $174,000 for annual domain name renewals. Based on
current projections, the Companys monthly cash operating expenses going forward
for the remainder of the fiscal year should be approximately $62,000 per month,
which includes the remaining yearly cost of the renewal of the existing domain
names totaling $43,401.  In addition to the normal monthly operating
expenses, the Companys committed cash requirements for the six months ending
February 28, 2011, will need to include $100,089 for website development
services. A promissory note with Jeff Mills, a director and stockholder of the
Company, has a balance due of $86,304 at August 31, 2010, and is payable upon
demand.  The Company intends to pay the balance of the note in fiscal year
2011.  From September 1, 2010, to October 15, 2010, the Company has
received cash proceeds of $15,000 from stock subscription receivables and will
continue to collect on its remaining stock subscription receivables to fund its
operations.  As of
August 31, 2010, the Company has the following stock subscription agreements
outstanding of which the majority is due from a related party:  2005 Agreements  Material terms of the subscription agreements received by the
Company on August 31, 2005, for 78,376 restricted common shares and on December
30, 2005 for 4,733,333 restricted common shares at $0.75 per share (total value
of $3,608,782) are as follows:  · Payment
is due in full in 60 months. · At
24 months, the Company can demand at its option, monthly 1/36 payments on the
subscription agreement. · The
Company has the option to charge simple annual interest of up to 4%. · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.  The outstanding
balance owed on the 2005 subscription agreements at August 31, 2010 is
$488,013.  2007
Agreements  On
October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share (total value of $3,250,000).  Significant
terms of the original subscription agreement are as follows:  · The
price per share of $2.50 was based on the closing price on October 4, 2007.


17


· At
24 months, 1/36 payments are due monthly. · The
Company, at its option, may call up to 1/12 of the gross receivable per month if
the preceding 30 day average trading price is at or above $7.00 a share with
minimum trading volume of 5,000 shares per day. · If
the purchaser sells these common shares, the purchaser shall be entitled to an
amount equal to 200% of the original purchase price of each share and the
Company shall be entitled to 50% of any additional net sales proceeds from the
stock sale.  On
February 25, 2010, due to the recent economic downturn and the market value
decline of the Companys stock, which was trading below $2.50 per share, the
Company amended the pricing terms of the subscription agreements received by the
Company on October 5, 2007.  The amendment changed the following
significant terms of the subscription agreement:  The
parties agree that the Initial Pricing terms in the Confidential Binding Term
Sheet dated October 5, 2007 of the Agreement will be amended to state as
follows:  1. The Subscriber offers to purchase shares of the Company for $0.75
per share.  After the price adjustment, the revised total value of this
subscription agreement is $975,000.  The
following other provisions of the Initial Pricing and Final Pricing terms in the
Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will be
deleted, and are not enforceable by either party:  · Beginning October 5, 2009, 1/36 payments are due each month
thereafter on the 5th of every month. · The Company at its option may call up to 1/12 of the (gross)
receivable note per month if the preceding 30 day average trading price is at or
above $7.00 a share.  Minimum trading volume must be 5,000 shares a
day. · As total consideration for the purchase and sale of the Companys
stock, purchaser shall ultimately pay to the Company the following amount (the
Purchase Price): A. Purchaser shall first be entitled to an amount equal to 200% of
the face amount of each share. B. After the purchaser receives the amount in A above, the Company
shall be entitled to 50% of any additional net sales proceeds of the stock.
 Net sales proceeds shall mean the gross proceeds received from the sale of
the stock, less reasonable brokerage commissions. C. Final adjusted net sales proceeds will be wired to the Company
within 7 days from the final settlement of the sale of stock sold.  The
outstanding balance owed on the revised 2007 subscription agreements at August
31, 2010 is $975,000.  2010
Agreement  Material terms of the subscription agreement received by the
Company on June 22, 2010, for 400,000 restricted common shares at $0.75 per
share (total value of $300,000) are as follows:  · Payment
is due in full in 60 months.


18


· At
24 months, the Company can demand at its option, monthly 1/36 payments on the
subscription agreement. · The
Company has the option to charge simple annual interest of up to 4%. · The
Company will provide downside protection of up to 30% of the stock price upon
conversion.  The outstanding
balance owed on the 2010 subscription agreement at August 31, 2010 is
$300,000.  Summary  As of
August 31, 2010, the Company had stock subscription receivables of $1,763,013
and for the six months ended August 31, 2010, the Company received stock
subscription payments of $431,450.  The
following table summarizes the stock subscription receivable, by quarter, at
August 31, 2010:   Quarter Ended
Total Balance Due
Total Amount Collected
New Subscription Agreements
(3)
Amended Purchase Price
(1)
Participatory Rights in the
Proceeds of the Resales Collected
Amount of Downside Protection
ProvidedMay 31, 2009
$  4,476,963



-
-August 31, 2009
4,371,463
$   105,500


-
-November 30,  2009
4,312,963
58,500


-
-February 28, 2010
1,894,463
143,500

$ 2,275,000
(2)
-May 31, 2010
1,535,513
358,950August 31, 2010
1,763,013
72,500
300,000  (1) Amendment to the terms of the
subscription agreements received by the Company on October 5, 2007 for 1,300,000
restricted common shares reducing the price paid per share from $2.50 to
$0.75. (2) The participatory right terms of the
original subscription agreements were cancelled on February 25, 2010. (3) New subscription agreement received
on June 22, 2010.  The
Company has not exercised its rights, per the 2005 subscription agreements, to
demand monthly 1/36 payments or to charge up to 4% interest on the subscription
amounts outstanding and they have provided no downside protection to the
subscribers.  The downside protection in the terms for the 2005
subscription agreements requires the Company to reimburse the subscription
holder up to 30% of the $.75 purchase price, or $.225, if the market price of
the stock is below $.75 when converted. The protection may be provided in
additional shares if necessary.  For the six month period ended August 31,
2010, there was no downside protection provided because the stock price did not
go below $.75 when converted.  The subscription agreements do not define
the term when converted.  The Company has taken the position that if at
the time that a purchaser makes a payment in full for the shares under a
subscription agreement and the closing price of the shares of the Companys
stock is less than $.75, the shareholder would be entitled to up to 30%
additional shares, depending on the trading share price.  Once the
subscription shares have been paid for in their entirety, the downside
protection ceases.  In
summary, we believe our current cash reserves and the amounts we expect to
collect on our outstanding stock subscription receivables should be sufficient
to enable us to operate for the next 12 months. In the event that we are unable
to collect our future stock subscription receivables as needed, we would be
forced to reduce operating expenses and/or cease operations altogether.


19


Critical Accounting
Policies  The
discussion and analysis of DigitalTown, Inc.s financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
expenses and related disclosure of contingent assets and liabilities. Management
reviews its estimates on an ongoing basis. Management bases its estimates on
historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. While DigitalTown Inc.s significant accounting policies are
described in more detail in Note 2 to its financial statements, management
believes the following accounting policies to be critical to the judgments and
estimates used in the preparation of its financial statements:  Intangible
Assets  Domain Names/Website Development Costs  Domain name costs are accounted for in accordance with the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC 350-30) guidance pertaining to Intangibles-Goodwill and Other, Website
Development Costs.  Certain modules and components of the Companys overall
website development are ready for their intended use and the Companys resulting
websites are currently operational. Accordingly, the annual domain name renewal
fees are currently being amortized over one year and the purchase of any new
domain names are capitalized.  Previously, during the infrastructure
development stage of its websites, the Company capitalized the purchase of new
domain names and the annual domain name renewal fees. Since the ownership of
each domain name can be renewed for a nominal renewal fee each year prior to
their expiration date, the useful lives of the domain names are deemed to be
indefinite and no amortization of the capitalized costs for the domain names
will be recorded.  Website development costs are accounted for in accordance with the
FASB Accounting Standards Codification (ASC 350-30) guidance pertaining to
Intangibles-Goodwill and Other, Internal-Use Software which requires that all
internal and external costs incurred to develop the internal-use software
necessary to operate the websites be capitalized.  The guidance further
states, amortization should begin when an individual module or component of the
overall internal-use software is ready for its intended use.  The Company
has components of its website development that are operational.  The cost
of such module or component are being amortized on a straight-line basis over
its estimated useful life of three years, as determined by the Company, after
taking into account the effects of obsolescence, technology, competition and
other economic factors.  Impairment
of Long-Lived Assets  Long-lived assets, such as property and equipment and intangible
assets  domain names/website development costs are reviewed for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset.


20


Stock-Based
Compensation  The Company measures and recognizes compensation expense for all
stock-based payment awards made to employees and directors on a straight-line
basis over the respective vesting period of the awards.  The
compensation expense for the Company's stock-based payments is based on
estimated fair values at the time of the grant of the portion of stock-based
payment awards that are ultimately expected to vest.  The Company estimates the fair value of stock-based payment awards
on the date of grant using the Black-Scholes option pricing model. This option
pricing model involves a number of assumptions, including the expected lives of
stock options, the volatility of the public market price for the Company's
common stock and interest rates.  Recently issued
accounting pronouncements:  In
January 2010, the FASB issued Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair- value measurements. This guidance is
effective for annual reporting periods beginning after December 15, 2009, except
for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The adoption of this guidance did not have an
impact on our consolidated financial statements.  FORWARD-LOOKING
INFORMATION  Any
statements contained herein related to future events are forward-looking
statements.  Readers are cautioned not to place undue reliance on
forward-looking statements. DigitalTown, Inc. undertakes no obligation to update
any such statements to reflect actual events.  ITEM 3.
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.  We are
exposed to market risk for the effect of interest rate changes.
 Information relating to quantitative and qualitative disclosure about
market risk is set forth below and in Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources.
 As of August 31, 2010, the Company did not have any off-balance sheet
investments or hedging investments.  ITEM 4. CONTROLS
AND PROCEDURES  (a) Evaluation of
Disclosure Controls and Procedures.  Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness, as of August 31, 2010, of our
disclosure controls and procedures, as defined in Rules 13(a)-13(e) and
15(d)-15(e) under the Securities Exchange Act of 1934, as amended, or the
Exchange Act. The purpose of this evaluation was to determine whether as of the
evaluation date our disclosure controls and procedures were effective to provide
reasonable assurance that the information we are required to disclose in our
filings with the Securities and Exchange Commission, or SEC, under the Exchange
Act (i) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii)


21


accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. Based on their evaluation, our
management has concluded, as previously discussed in Item 9A(T) of our Form 10-K
for the fiscal year ended February 28, 2010, that material weaknesses continue
to exist in our internal control over financial reporting as of August 31, 2010,
and as a result our disclosures controls and procedures were not effective.
 Notwithstanding the material weaknesses that continue to exist as of
August 31, 2010, our chief executive officer and chief financial officer have
concluded that the financial statements included in this Quarterly Report on
Form 10-Q present fairly, in all material aspects, the financial position,
results of operations and cash flows of the Company in conformity with
accounting principles generally accepted in the United States of America
(GAAP).  (b) Changes in
Internal Controls over Financial Reporting.  Management continues to
evaluate the Companys Internal Controls over Financial Reporting to insure that
the design and implementation of corrective procedures are adequate to remediate
the previously identified material weaknesses.   Management also
continues to analyze the cost effectiveness of adding additional corrective
procedures to remediate their existing material weaknesses.  During
the fiscal quarter ended August 31, 2010, there was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.  PART II  ITEM 1.
 LEGAL PROCEEDINGS  DigitalTown, Inc. is, from time to time, a party to litigation
arising in the normal course of its business.  The Company believes that
none of these actions will have a material adverse effect on its financial
condition or results of operations.  ITEM 1A.
 RISK FACTORS  The
most significant risk factors applicable to the Company are described in Part I,
Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended
February 28, 2010.  There have been no material changes from the risk
factors previously disclosed in our Annual Report on Form 10-K.  ITEM 2.
 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  On
August 15, 2010, the Company issued 7,917 restricted common shares at $1.20 the
market price per share, valued at $9,500, to seven directors of the Company for
payment of director fees.  On June
22, 2010, the Company issued 400,000 restricted common shares at a price of
$0.75 per share to an existing shareholder (related party), valued at $300,000
in exchange for a stock subscription agreement (see further details in Note 9,
2010 Agreement).  On June
7, 2010, the Company issued 20,892 restricted common shares at $1.35, the market
price per share, valued at $28,204, to Richard Pomije, the CEO and Chairman of
the Company for payment of deferred compensation.


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On May
15, 2010, the Company issued 2,491 restricted common shares at $1.75, the market
price per share, valued at $4,359, to six directors of the Company for payment
of director fees.  During
the quarter ended May 31, 2010, the Company entered into stock purchase
agreements and issued 6,667 units (each unit consisting of one share of common
stock and a two-year warrant to purchase one share of common stock at an
exercise price of $4.00 per share) at a unit price of $1.50, for total cash
proceeds of $10,000.  These shares are
unregistered with no underwriter used for the sale of common stock.  The
shares of stock were sold pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D
promulgated thereunder.  ITEM 3.
 DEFAULTS UPON SENIOR SECURITIES  None.  ITEM 4. 
(REMOVED AND RESERVED)   ITEM 5. 
OTHER INFORMATION  (a) All
information required to be disclosed on a report on Form 8-K during the period
ended August 31, 2010, has previously been reported. (b) There
have been no material changes to the procedures by which security holders may
recommend nominees to the registrants board of directors.   ITEM
6.  EXHIBITS  3.1
Articles of
Incorporation, as amended (1)
Previously
Filed3.2
Bylaws
(1)
Previously
Filed31
Certifications
of Chief Executive Officer and Chief Financial Officer under Rule
13a-14(a)/15d-14(a)
Included32
Certifications
under Section 1350
Included  (1) Incorporated by
reference to exhibit filed as a part of Registration Statement on Form 10-SB
(Commission File No. 000-27225).


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SIGNATURES  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.  DigitalTown,
Inc.  Dated:
October 15, 2010  */s/
Richard A. Pomije*_____________________ Richard
A. Pomije, CEO  */s/
Paul R. Gramstad*____________________ Paul
R. Gramstad, CFO


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